(The) effect of political and economic uncertainty on the cryptocurrency market

Abstract

This study contributes to the scant academic and scientific literature concerning cryptocurrencies by measuring the effect of political and economic uncertainty on the cryptocurrency market. Previous work has been limited to analyzing the effect of uncertainty on the returns and volatility of only bitcoin. We depart empirically from these studies by analyzing the behavior of the top 25 cryptocurrency coins, which together represent nearly 95% of the total market capitalization. We use a fixed effect regression with Driscoll-Kraay standard errors and find that global economic policy uncertainty has a negative effect on the cryptocurrency market, whereas periods of extreme geopolitical tensions have a positive effect on the volatility and returns of the market. Our results are robust to alternative measures of uncertainty, a random sample of coins with a smaller market capitalization, and the use of an alternative methodology. We suggest several implications for investment managers, users, and policymakers. Additionally, we provide recommendations for future research.